It looks as if Gordon Brown has decided on a scorched earth strategy to deal with the nationalist administration in Scotland. Only months after Scotland received the lowest CSR public spending allocations since devolution - 1.8% over three years against 2.1% for the UK - he's threatening to chop the Barnett formula. It's provocative to say the least. The review will be perceived as a vindictive response to Labour's loss of power in Scotland. Unable to derail the nationalists in the Scottish parliament, Brown is looking to cut off its financial lifeline.

But this will open a can of constitutional as well as fiscal worms. Brown knows perfectly well that the Barnett formula is at best an inaccurate reflection of relative spending north and south of the border. The claimed £1,500 per head in extra spending for Scotland is substantially less than the amount Londoners get over and above the UK average. If Barnett is reviewed, London will feel the heat too, and so will Northern Ireland which "gets" even more.

Moreover, Barnett ignores "non-identifiable" spending on things like defence, the London Olympics and infrastructure projects like Crossrail which disproportionately benefit the south-east of England. The Barnett formula also, of course, ignores oil revenues, currently running at around £11bn a year. Any reassessment of Scottish spending would have to include these elements. You only need to look at Norway, which now has one of the largest sovereign wealth funds in the world - worth some £350bn and built on oil revenues- to see what Scotland has given away in the last 30 years for the dubious privilege of receiving Lord Barnett's handouts. The truth is that for England, Barnett is a pretty good deal.

By all means review the financial arrangements, but be advised that the consequence will almost inevitably be a disaggregation of the UK. The Barnett formula is cipher for the fallacious argument that Scots are using "English taxes" to pay for generous policies like abolishing prescription charges, free elderly care and student debt. But these policies are funded from within the existing - and shrinking - budgetary "pool", not from additional fiscal impositions on England. Indeed, according to the Government Expenditure and Revenue Survey, Scotland's relative advantage in identifiable public spending has been eroded over recent years.

Perhaps the sensible solution to all this is a form of fiscal federalism, whereby Scotland raises the money it spends from its own taxation, with cross-subsidies and oil taken into account. This works perfectly well in countries like Australia and Spain. But be warned, it would not end the Barnett formula, because under any system short of outright independence for Scotland, there would still be needs-based redistribution between and within regions and that would mean some kind of fiscal equalisation formula.

The only "pure" solution to the spending conundrum is a separate Scottish nation, which is why the Scottish National party also supports the scrapping of Barnett. Perhaps independence for Scotland is inevitable, but it is curious that the prime minister should be putting his weight behind it.

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